Experienced investors are flummoxed by the Fed’s unwillingness to do anything about the current speculation in markets. The Fed doesn’t want to tighten policy because the real economy is still in bad shape. It’s a difficult situation to be in because if they acknowledge that the current speculation in stocks posed a systemic risk, it would scare the market. Secondly, the Fed would have to act to curtail this risk. It can’t just say there is systemic risk, but do nothing about it. Obviously, allowing the current speculation to continue could have many negative impacts, but whether it’s a bubble is up to interpretation.

As we mentioned in a previous article, the Fed is not likely to stop this bubble. It’s not entirely the Fed’s fault either as retail investors have a lot of cash and time to invest. However, the Fed has the power to get rid of the excess if it wanted to. A hawkish statement would change sentiment. As for now, we have a market that’s going vertical. As you can see from the chart below, the monthly Russell 2000 hasn’t been this far above its Bollinger Bands in 20 years.

Is It A Bubble?

If the stock market experienced a drawdown, there would be huge ramifications because pension funds and mutual funds have their lowest cash positions in decades. Everyone is fully invested. Anyone can have an opinion on whether this is a bubble or not, but the valuations don’t look good. As you can see from the chart below, the Russell 2000’s EV to trailing 12-month sales ratio is at a record high by far (going back to 1995).